The minimalistic trend being ushered in by a new generation of consumers to use products rather than own them is being fueled by the fact that today’s newer generation of customers value experiences over possessions and prefer to make greener choices than their older kin. As sustainability and minimalism continue to make their way to the forefront of consumer trends, it’s garnering the attention of C-level executives, resulting in the deployment of new business and operating models. These new models are enabling manufacturers to pivot to the future and transition from selling products to selling the output of those products, also known as Products-as-a-Service (PaaS).
But this minimalistic idea of using rather than owning is not new: John Lennon said it best in 1971 when he sang, “imagine no possessions, I wonder if you can.” It’s possible he was imagining a future—a not so distant future—where we no longer purchase possessions such as CDs, heating systems, cars, boats and tractors, but rather purchase access to the value or the output these products deliver. The future is here and it’s igniting the development and deployment of new and innovative business models that are enabling manufacturers across diverse industries, from construction and agricultural equipment to HVAC and automotive, to future-proof their businesses by accelerating the transition from selling products to selling products as a service. This transformation is driven by a change in customer demands and the way we feel about ownership.
Unlike their parents, today’s generation of consumers opt to spend money on experiences rather than on depreciating assets; and what’s the most depreciating consumer asset people buy every day? Cars. The average cost to own a car is $30,000, which depreciates with every mile driven – plus, it sits unused for approximately 95% of the time. Factor in fuel, maintenance, repairs and parking cost and the investment becomes even less attractive – which is exactly why pay-per-use models like Uber and Lyft are becoming so popular. Combine this with the trend toward urbanization, which results in fewer cars on the road, lowered carbon emissions, and less need for parking spaces (read: more green space) and you have a business model that further supports long-term sustainability.
So, as manufacturers rethink the entire relationship between the products they make, and the way consumers access them, they have the opportunity to reconfigure the product lifecycle to incorporate more sustainable design principles. And, ultimately, making products, and subsequently organizations, more sustainable long-term, is all part of the quest to use the world’s scarce resources in a much more efficient way – which is a key pillar of the circular economy.
What is the circular economy?
While complex in theory, the simplest description of the circular economy is the shift from a linear ‘take-make-waste’ model of production, to one that follows a ‘take-make-use-reuse’ model that turns resources into products, then back into resources again. But, to better understand what a circular economy is, let’s start with what it’s not: recycling. Recycling, a very similar concept, is often conflated with the circular economy. But according to Bloomberg, the circular economy is “more systemic and ambitious than recycling.” Cheap materials that have been recycled over and over decrease in quality over time; take plastic bottles, for example. In order to maintain consistent quality over time, plastic bottle makers have to blend recycled plastic with virgin material, instead of relying on recycled bottles alone. But, in an ideal circular economy scenario, the cycle would involve no new material input at all – just the original resource. This requires the right, high-quality design from the start – hence the systemic nature of the circular economy’s success.
What are the implications of shifting to the circular economy way of manufacturing?
According to McKinsey, the circular economy requires top-down management and change across a company, including reevaluating product design, business models and the supply chain. And, a more circular supply chain means changing completely to reusable materials, extending the lifecycle of a product and improving material recovery at the end of its life. Think: if Apple were to shift to a business model that incorporates planned obsolescence, where products are designed for a subscription-based revenue model over an annual new product revenue model, both the customer and the OEM would be incentivized to make products that last – and potentially even make them reconfigurable based on the right technology, materials, etc.
This kind of shift would ultimately reduce emissions, waste and – eventually – cost. But it’s no secret that we live in an imperfect world, so making a production cycle as fully self-sufficient as the circular economy is almost impossible. Some new input will always be necessary, and some waste will always be created. Another implication of shifting to circular economy is high upfront costs due to the need to invest in redesigning products and reconfiguring materials. In fact, the U.K. estimates the cost of shifting to a circular economy to be about 3% of gross domestic product.
Which industries does the circular economy affect most?
The circular economy has the potential to impact all industries, but particularly heavy equipment manufacturers, specifically due to the expensive nature of these products’ maintenance and production. And, because this concept isn’t necessarily new, many industries are already coming close to making the circular economy a reality. In fact, as of today, almost all parts of a car can be reclaimed, and heavy trucking manufacturers are not far behind. There is even a multinational push by General Motors, BMW and Toyota to create after-sales demand for repurposed electric car batteries, which have been used in convenience store refrigerators in Japan and solar energy banks in Cameroon. But, some industries have further to go, with 97% of the materials used to make clothing coming from net new resources, and 73% of these products ending up incinerated or put into a landfill.
How can manufacturers minimize the impact of a shift to the circular economy on their business?
In today’s changing world, product advancements alone will not enable you to gain or sustain the competitive differentiation needed to ensure long-term survival. Shifting from a product-led growth strategy – which has sustained organizations for many decades – to a circular economy strategy will require companies to embrace change, think differently, act differently, and embrace technology to completely transform their businesses. This means not only a shift to servitization, but a complete pivot towards sustainability and scalability. But, this pricey pivot begs the question: will expenses cause companies to go for quick fixes rather than longer-term sustainable practices? Maybe, but McKinsey researchers have continued to maintain that by using and reusing natural capital as efficiently as possible, manufacturers will ultimately extend the value throughout the life cycles of finished products – and helping companies get more value out of the energy, materials and other resources they use is at the heart of the circular economy.
What are the best resources to learn more about the circular economy?
- The Ellen MacArthur Foundation’s website on the circular economy.
- The McKinsey Report “Growth Within: A Circular Economy Vision for A Competitive Europe”
- The European Union’s circular economy action plan.
- The Ellen MacArthur Foundation’s YouTube video on Circular Economy in cites.
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